FCA recommends ban on ‘extortionate’ exit fees charged by investment platforms

Posted: 15/03/2019

In a move foreseen by many, and very much welcomed by investors, the Financial Conduct Authority (FCA) has set out plans to ban exit fees charged by investment platforms used by millions of investors and their financial advisers.

This week the City watchdog has launched its final report into investment platforms. The report seeks to improve consumers’ ability to switch between platforms and enable them to benefit from lower costs and/or better functionality that suits their needs. It puts forward three key proposals:

• a requirement for platforms to offer consumers the choice to move units in investment funds that are common to both platforms via an ‘in-specie’ transfer;
• a requirement for platforms to request a conversion of unit classes, where this is necessary to enable an ‘in-specie’ transfer to take place;
• a requirement for platforms to ensure that consumers moving onto a new platform are given an option to convert to discounted units, where they are available for investment by the consumer.

The FCA first published an interim report in July 2018 and gave firms until early 2019 to make it easier for customers to transfer their investments to another company. Following a process of consultation that began in 2017, it found that 7% of all consumers wanted to switch but were put off from doing so, with many citing high exit fees as a significant hurdle. Indeed, consumers can face charges worth hundreds of pounds should they decide to switch platforms.

In a market offering hundreds of complex investment opportunities, transparency and clarity are valued. This is another example of financial mis-selling as at present many investors are seldom made aware of the exit fees at the time of investing.

Alongside its wider study into investors' ability to change fund shops, the regulator published a consultation paper on banning exit charges, describing them as one of the main barriers to switching between providers. 

In the final report the FCA announced an end to the charges, which it said stifled competition. It has generated some market concern by stating that it was considering extending the ban on exit fees to other companies that serve retail investors, such as wealth managers, insurers and fund managers.

The FCA has acknowledged that firms that charge exit fees could respond to restrictions by increasing other platform charges. However, it concluded that because exit fees in 2017 only accounted for 0.2% of firms’ revenue on average, any increase in other charges should be limited.

Platforms are online services that allow investors or their advisers to buy and sell funds or shares and hold them in one convenient account.

The investment platforms market has almost doubled in size to £500 billion since 2013 and an extra 2.2 million customer accounts have been opened over the last five years. The industry has circa £500 billion of assets under administration.

The FCA has stated that it would prefer to ban exit fees, but could cap them. The decision is out for consultation.

The moves were broadly welcomed by many of the leading investment platforms in the UK, a number of which stressed they did not charge exit fees. Many in the industry see an outright ban as inevitable as the FCA has been flagging its concern for some time. Banning exit fees would remove one of the main barriers restricting consumers from switching platforms.

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